The Customs, Excise and Service Tax Appellate Tribunal has delivered a landmark ruling affirming that procedural compliance under the Central Excise Act is non-negotiable. The Tribunal set aside a substantial excise demand after finding that the department failed to adhere to mandatory evidentiary requirements for both search documentation and witness testimony, reinforcing the principle that substantive rights cannot be adjudicated on the basis of procedurally tainted evidence.
Background & Facts
The Dispute
The dispute arose from a search operation conducted by the Directorate General of Central Excise Intelligence at an unregistered factory located at Khasra No. 1340, Village Balenga, District Bastar, Chhattisgarh, on 30.01.2017. The department alleged that the appellant, Shri Natwar Lal Sharda, was the actual manufacturer and beneficiary of clandestinely produced pan masala and gutkha under the brand name "Nazar". The department issued a show cause notice dated 28.12.2020 demanding central excise duty of Rs. 477,32,30,000 for the period April 2015 to January 2017, along with interest and penalty. The Additional Director General, by order dated 27.09.2024, confirmed duty liability for the period April 2016 to January 2017, but dropped the demand for the earlier period (April 2015 to March 2016). Both the appellant and the department filed appeals against this order.
Key Facts
- The appellant is the Managing Director of Sanwaria Sweets Pvt. Ltd., Jaipur, and proprietor of Sharda Food Products, Jaipur, engaged in sweets and bakery production.
- The factory at Balenga was operated by S.S. Industries, Jaipur, under a license from Siddheshwar Tobacco Products Ltd., Pandhurna.
- The brand "Nazar" was originally registered by Ashish Sharda, the appellant’s nephew, and later assigned to Siddheshwar Tobacco Products Ltd.
- On 30.01.2017, a search was conducted at the unregistered factory, yielding:
- 10 Fill Form Seal (FFS) pouch packing machines, 9 of which were operational
- 30 workers engaged in packing
- Raw materials: 6776 kg cut supari, 1875 kg katha powder, 250 kg perfume, 35 kg menthol, 120 kg glycerine, 1620 kg mix compound
- Finished goods: 18,69,000 pouches of Nazar Premium Gutkha, 11,89,500 pouches of Nazar Pan Masala, and others totaling Rs. 59,71,800
- Packing materials for brands: Nazar, Vachan, Virat, Bajirao, Nagpuri
- A handwritten pocket diary maintained by Rajkumar Menghani
- Three mobile phones
- The two Panch witnesses were Dilip Kumar (residing in Raipur, 300 km away) and Sheikh Shabbir Ali (residing in Visakhapatnam, over 300 km away).
- The Panchnama dated 30.01.2017 did not record any attempt to secure local witnesses or explain why distant persons were chosen.
- The second Panchnama dated 24.01.2018 was drawn at the appellant’s request to add weight and MRP details, using the same two Panchas.
- Statements under Section 14 of the Central Excise Act were recorded from 27 individuals, including the appellant, Nitin Sabaghchandani, Rajkumar Menghani, and suppliers.
- The appellant retracted his statement dated 27.08.2017 via letter to the Chief Metropolitan Magistrate, Patiala.
- The department issued five summonses to the Panch witnesses for cross-examination between February and April 2024; none appeared.
- The department did not examine the Panch witnesses or the persons whose Section 14 statements were relied upon.
Procedural History
- 30.01.2017: Search conducted at Khasra No. 1340, Village Balenga, Bastar; Panchnama drawn
- 24.01.2018: Second Panchnama drawn at appellant’s request
- 30.01.2017 to 10.01.2020: Statements recorded under Section 14 from 27 persons
- 28.12.2020: Show cause notice issued demanding Rs. 477,32,30,000 for April 2015 - January 2017
- 30.11.2023 and 16.05.2024: Appellant’s replies filed challenging admissibility of evidence
- 27.09.2024: Order-in-Original passed by Additional Director General:
- Confirmed duty for April 2016 - January 2017
- Dropped demand for April 2015 - March 2016
- Imposed penalty equal to duty amount
- Ordered confiscation of seized goods
- 19.02.2026: Hearing before CESTAT
- 06.04.2026: Final Order passed by CESTAT
The Parties' Positions
For the Appellant
- The Panchnamas are invalid because the Panch witnesses were not inhabitants of the locality, violating Section 100(4) of the CrPC and Section 18 of the Central Excise Act.
- The Panch witnesses were not examined or cross-examined, violating principles of natural justice.
- Statements under Section 14 are inadmissible because the persons were not examined as witnesses under Section 9D of the Central Excise Act.
- The pocket diary is inadmissible as the author was not examined.
- The appellant’s statements were retracted and misquoted in the show cause notice.
- There is no evidence linking the appellant to the purchase of land, machinery, or payment of wages at the factory.
For the Respondent (Department)
- The Panchas were available and their non-local residence does not invalidate the Panchnamas.
- Section 100(4) of CrPC is directory, not mandatory.
- The appellant lacks locus standi to challenge the Panchnamas as he does not claim ownership of the factory or goods.
- Section 9D is not mandatory; cross-examination is discretionary.
- The appellant’s own statements and corroborative evidence from suppliers and transporters establish his control over the factory.
- The diesel generator found at the site implies manufacturing activity from April 2015.
Relief Sought
The appellant sought quashing of the demand for April 2016 - January 2017, annulment of penalty and confiscation, and dismissal of the department’s appeal against the dropped demand for April 2015 - March 2016. The department sought restoration of the entire demand for April 2015 - January 2017.
The Legal Issue
The central question was whether the Central Excise Act permits the imposition of duty, interest, and penalty based on Panchnamas drawn in violation of Section 100(4) of the Code of Criminal Procedure and statements recorded under Section 14 without compliance with the mandatory procedure under Section 9D.
Arguments Presented
For the Appellant
The appellant relied on Pradeep Narayan Madgaonkar v. State of Maharashtra, Yeduru Sreenivasulu Reddy v. State of Andhra Pradesh, and Meenu Paper Mills v. CCE & ST Meerut-I to argue that Panchnamas are vitiated when Panch witnesses are not from the locality and are not examined. He cited Arya Bhushan Bhandar v. Union of India and Kamlesh Gupta v. Commissioner of Customs to assert that non-production of Panch witnesses for cross-examination violates natural justice. He further relied on M/s Surya Wires Pvt. Ltd. v. Principal Commissioner, CGST, Ambika International v. Union of India, and Hi Tech Abrasives Ltd. v. Commissioner of C. Ex. to argue that Section 9D is mandatory and requires examination of the witness before the adjudicating authority before any statement under Section 14 can be admitted. He contended that the pocket diary, being a third-party document, cannot be relied upon without examination of its author.
For the Respondent
The department argued that Section 100(4) of CrPC is directory and that non-local Panchas do not invalidate searches, citing State of Punjab v. Balbir Singh and Anwar Ali v. State of Himachal Pradesh. It contended that the appellant lacks locus standi to challenge the Panchnamas since he does not claim ownership of the factory or seized goods. Regarding Section 9D, it argued that cross-examination is a procedural facility, not a right, and that the Tribunal has discretion to deny it to prevent misuse. It relied on the appellant’s own statements and corroborative evidence from suppliers and transporters to establish his control over the factory.
The Court's Analysis
The Tribunal conducted a rigorous analysis of both procedural and evidentiary compliance under the Central Excise Act. It began by examining the validity of the Panchnamas dated 30.01.2017 and 24.01.2018. The Court noted that Section 18 of the Central Excise Act mandates that searches be conducted in accordance with the Code of Criminal Procedure, including Section 100(4), which requires the officer to summon "two or more independent and respectable inhabitants of the locality" where the search is conducted. The Panchas in this case resided in Raipur and Visakhapatnam, over 300 km from Bastar. The Panchnamas did not record any attempt to secure local witnesses or explain why distant persons were chosen.
"The Panchnama also does not record that inhabitants of the locality were not available or willing to be a witness to search, nor does it record why persons whose addresses were of places situated more than 300 kms were called upon as witnesses."
The Tribunal followed Pradeep Narayan and Yeduru Sreenivasulu Reddy to hold that the search was procedurally defective. It rejected the department’s argument that the appellant lacked locus standi, noting that the entire demand against him was based on the Panchnamas, making him directly affected.
The Court then turned to Section 9D of the Central Excise Act, which governs the admissibility of statements recorded under Section 14. It emphasized that Section 9D(1)(b) requires two mandatory steps: (i) examination of the person who made the statement as a witness before the adjudicating authority, and (ii) a reasoned opinion by the authority that the statement should be admitted in the interests of justice. The Tribunal cited Ambika International v. Union of India and Hi Tech Abrasives Ltd. v. Commissioner of C. Ex. to affirm that Section 9D is mandatory and not directory. The Additional Director General had failed to examine any of the 27 persons whose statements were relied upon, including the appellant.
"The provisions of section 9D of the Central Excise Act have been held to be mandatory and failure to comply with the procedure would mean that no reliance can be placed on the statements recorded either under section 14 of the Central Excise Act or under section 108 of the Customs Act."
The Tribunal also rejected the department’s reliance on the pocket diary, noting that its author, Rajkumar Menghani, was not examined. The appellant’s statements were found to be either retracted or misquoted. The statement dated 10.01.2020, which the department claimed showed admission of ownership, was incomplete and misrepresented.
The Court concluded that without the Panchnamas and Section 14 statements, there was no evidence to establish that the appellant was the manufacturer of the goods. The department’s reliance on indirect evidence - such as raw material purchases or transport records - was insufficient to establish direct control or manufacturing activity.
The Verdict
The appellant succeeded on both appeals. The Tribunal set aside the order dated 27.09.2024 in its entirety. The demand for central excise duty for the period April 2016 to January 2017, along with interest and penalty, was quashed. The confiscation of goods was annulled. The department’s appeal challenging the dropping of the demand for April 2015 to March 2016 was dismissed. No monetary relief was awarded, as the entire demand was found legally unsustainable.
What This Means For Similar Cases
Procedural Compliance Is Non-Negotiable
- Practitioners must ensure that all search proceedings strictly comply with Section 100(4) of the CrPC; failure to secure local witnesses invalidates the Panchnama.
- Adjudicating authorities cannot rely on Panchnamas where the Panch witnesses are from distant locations without documenting efforts to secure local witnesses.
- Non-production of Panch witnesses for cross-examination, even if they fail to appear, renders the Panchnama inadmissible under Arya Bhushan Bhandar.
Section 9D Is Mandatory, Not Discretionary
- Statements under Section 14 of the Central Excise Act cannot be used unless the person is examined as a witness before the adjudicating authority.
- The authority must record a reasoned opinion under Section 9D(1)(b) before admitting any such statement.
- Cross-examination is not a privilege to be granted or denied at will; it follows as a matter of right after the statement is admitted under Section 9D.
- Failure to comply with Section 9D renders the entire demand unsustainable, regardless of the volume of corroborative evidence.
Documentary Evidence Requires Authentication
- Private diaries, electronic data, or third-party records cannot be admitted without examination of their creators.
- Partial or selective quoting of statements in show cause notices is a fatal flaw and may be construed as suppression of exculpatory material.
- Indirect evidence such as supplier payments or transport records cannot substitute for direct proof of manufacturing control.
